PART D: AUDIT EVIDENCE

CHAPTER 10: AUDIT EVIDENCE

D15 Reliability of Audit Evidence

– The reliability of audit evidence is increased when it is obtained from

independent sources outside the entity.
– The reliability of audit evidence which is generated internally is increased when
the related controls imposed by the entity, including those over its preparation
and maintenance, are effective.
– Audit evidence obtained directly by the auditor is more reliable than audit
evidence obtained indirectly or by inference.
– Audit evidence in documentary form, whether paper, electronic or other
medium, is more reliable than evidence obtained orally.
– Audit evidence provided by original documents is more reliable than audit
evidence provided by photocopies or facsimiles, the reliability of which may
depend on the controls over their preparation and maintenance.

Assertions for Classes of Transactions, Account Balance and

Presentation and Disclosure:
Assertions [SOPL : COCA PC] Assertions [SOFP : CARE PC]
Completeness: Completeness:
Transactions and events that should Assets, Liabilities and Equity that
be recorded are recorded, and all should be recorded are recorded, and
related disclosures that should be all related disclosures that should be
included are included included are included
Accuracy: Accuracy, Valuation and
Amounts and other data relating to Allocation:
recorded transactions and events are Assets, Liabilities and Equity are
recorded appropriately, and related included in the financial statements at
disclosures are appropriately appropriate amounts and any resulting
measured and described valuation or allocation adjustments are
appropriately recorded, and related
disclosures have been appropriately
measured and described
Occurrence: Existence:
Transactions and events recorded or Assets, Liabilities and Equity exists
disclosed, have occurred and pertain
to entity
Classification: Classification:
Transactions and events are recorded Assets, Liabilities and Equity are
in the proper accounts recorded in the proper accounts
Cut-off: Rights and Obligation:
Transactions and events are recorded
in the correct accounting period Entity holds or controls the rights to
assets, and liabilities are the
obligations of the entity
Presentation: Presentation:
Transactions and events are Assets, Liabilities and Equity interest
appropriately aggregated or are appropriately aggregated or
disaggregated and clearly described, disaggregated and clearly described,
and related disclosures are relevant and related disclosures are relevant
and understandable in the context of and understandable in the context of
the applicable financial reporting the applicable financial reporting
framework framework
 SUBSTANTIVE PROCEDURES
1 AUDIT OF NON-CURRENT ASSETS
TANGIBLE NON-CURRENT ASSETS

1 Completeness
[ CAN ]
* accounting records
❖ Obtain NCA schedule (breakdown/list) agree to GL and NCAR and obtain explanations for differences
❖ Select a sample of assets physically exist and agree that they are recorded in the NCAR
[ C = Assets on site agree to NCAR ]
* accounting policy
Existence [ ENA ] ❖ Inspect high value assets and all ‘additions’ in-year and confirm items inspected exist, are in use, in good working
condition, and have correct serial number
[ E = NCAR agree to assets on site ]
Valuation ❖ Confirm cost to purchase invoices or valuation to valuation statement provided by valuer (expert)
* expert ❖ Consider the reasonableness of valuation reviewing the experience of valuer, scope of work, methods &
* adjustment assumptions used and valuation in line with accounting standards [ REQI ]
* cost ❖ Recalculate revaluation surplus or any adjustments to confirm accuracy
Valuation ❖ Review reasonableness of depreciation rates applied in relation to asset lives, residual value, replacement policy,
* Depreciation past experience of gains and losses on disposal, consistency with prior years and accounting policy and possible
obsolescence
Proof in Total (PIT): ❖ Recalculate depreciation rates to ensure it is calculated correctly ( GENERAL )
depreciation charge
❖ Recalculate the depreciation charge for a sample of additions and disposals to confirm the calculation are correctly
(estimated)
applied as per the company policy of a pro rata basis or a full year in the year of acquisition and none in the year of
disposal
(Cost + Additions -
❖ For revalued assets, confirm that the charge for depreciation is based on the revalued amount by recalculating it
Disposals) x
Depreciation% for a sample of revalued assets
= Charge in SOCI ❖ Inspect draft accounts to confirm that depreciation policies and rates are disclosed in the accounts
Rights and ❖ Inspect title deeds for land and buildings owned by company
 obligation ❖ Inspect motor vehicle registration document to confirm that they are in client’s name. Confirm all vehicles are used
* ownership for the client’s business
❖ Inspect purchase invoice for plant and fixture and confirm owned by company
Presentation ❖ Review NCA disclosure in the financial statements to confirm they meet IAS 16 criteria

MJ16 ADDITIONS AND DISPOSALS

2 Additions
*
acquisitions
❖ Obtain a breakdown of additions; Cast the list and agree updated to non-current asset register to confirm C A
❖ Select a sample of additions, agree cost to supplier invoice to confirm V
❖ Agree the addition to a supplier invoice in the name of company to verify rights and obligations
❖ Review the list of additions; Confirm that they relate to capital expenditure items rather than repairs and maintenance for C
❖ Review a sample of additions, recorded physically and verify them on the site to confirm E
❖ Recalculate the depreciation charge for a sample of additions to confirm the calculation are correctly applied as per the
company policy of a pro rata basis or a full year in the year of acquisition
Disposals ❖ Obtain a breakdown of disposals; Cast the list and agree all assets removed from the non-current asset register to confirm E
❖ Select a sample of disposals and agree sale proceeds to supporting documentation such as sundry sales invoices
❖ Recalculate the profit/loss on disposal and agree to the income statement to confirm V
❖ Consider whether proceeds obtained are reasonable; if large losses, obtain explanation

CAPITAL EXPENDITURES

3 ❖ Obtain a schedule (breakdown/list) of the capital expenditure, agree to supporting documents and cast to confirm completeness and
accuracy
❖ For those items treated as capital and included with property, plant and equipment, agree to purchase invoices and ascertain whether they
are in fact of a capital nature
❖ For capital items, agree to the NCAR to ensure that they are correctly included to conform completeness
❖ For capital items, recalculate the depreciation charged to ensure it has been appropriately time apportioned to confirm accuracy
 INTANGIBLE NON-CURRENT ASSETS

4 ❖ Obtain and cast a schedule of intangible assets; Agree the closing balances to the general ledger, trial balance and draft financial
statements
❖ Recalculate the amortisation charge for a sample of intangible assets which have commenced production; Confirm it is line with the
amortisation policy
❖ For new projects, discuss with management the details of each project along with the stage of development and whether it has been
capitalised or expensed
❖ For those expensed as research, agree the costs incurred to invoices and supporting documentation and to inclusion in profit or loss
❖ For those capitalised as development, agree costs incurred to invoices and confirm technically feasible by discussion with development
managers or review of feasibility reports
❖ Review the disclosures for intangible assets in the draft financial statements are in accordance with IAS 38 Intangible Assets.

SUMMARY NOTES
2 AUDIT OF INVENTORY
PERPETUAL INVENTORY COUNT

1 ❖ Perpetual inventory where management has a programme of inventory-counting throughout the year
❖ The inventory is divided into sections and different sections are counted at different times throughout the year
❖ The book inventory records are amended for any differences identified during each count and the final book inventory figure at the year-
end is used for preparing the financial statements for the year
PERPETUAL COUNT PROCEDURES
Before the count
❖ Confirm all inventory lines are counted at least once a year with higher value and desirable lines being counted more frequently
❖ Confirm and review management has satisfactory procedures for inventory counts and test-counting
❖ Confirm inventory records are kept up to date. Auditors may compare sales and purchase transactions with inventory movements and carry
out other tests on the inventory records i.e checking casts and classification of inventory
❖ The counting of inventory is carried out by suitably experienced independent individuals in a systematic and orderly manner
❖ Confirm any material discrepancies noted between inventory records and physical quantities are investigated immediately and reported to
management for immediate further follow up as appropriate
❖ All corrections to inventory records are authorised by a responsible official of the company independent of inventory count
❖ There are satisfactory procedures with regard to cut-off and receipt/issue documentation at the time of inventory counts.
During & After the count
❖ Attend one of the inventory counts
❖ Follow-up the inventor counts attended to compare quantities counted by the auditors with the inventory records, obtaining and verifying
explanations for any differences, and checking that the client has reconciled count records with book inventory records
❖ Review the year’s inventory counts to confirm the extent of counting, the treatment of discrepancies and the overall accuracy of records (if
matters are not satisfactory, auditors will only be able to gain sufficient assurance by a full count at the year-end)
❖ Assuming full count is not necessary at the year-end, compare the listing of inventory with the detailed inventory records, and carry out
other procedures (cut-off, analytical review) to gain further comfort
 BENEFITS OF PERPETUAL INVENTORY COUNTING
✔ There is no disruption caused by an annual inventory count; Fewer incidences of inventory reaching zero level causing unfulfilled orders
✔ Enables errors, slow-moving and damaged inventory to be identified earlier as there is more accurate and regular inventory counting
✔ Actual inventory balances are known at any time, thus allowing re- ordering/replenishment of inventory to be done promptly and timely
✔ Auditors can rely on the computerised inventory system, reducing substantive testing of inventory during the year and at the year end

PERIODIC INVENTORY COUNT

2 - Attendance at an inventory count gives evidence of the Existence and Ownership of inventory
PERIODIC COUNT PROCEDURES
Before the count

❖ 1 Review the prior year audit files to identify whether there were any particular warehouses where significant inventory issues arose last
year
❖ 2 Decide which of the warehouse the audit team members will attend, basing this on materiality and risk of each site including new, or
have experienced significant control issues
❖ 3 Review proposed inventory count instructions to identify any control deficiencies and if any are noted, Discuss them with management
prior to the counts
❖ Obtain from any third parties’ external confirmation of inventory they hold; Consider the need for expert help
During the count

❖ 1 Observe the counting teams to confirm whether the inventory count instructions are being followed correctly
❖ Confirm adequate supervisory controls with one individual assuming the overall responsibility for the inventory count
❖ Counters to be organised into teams, usually in pairs, both independent individual – to reduce the risks of error of fraud
❖ Inventory sheets should be standardized and pre-numbered; the numbers issued to counting teams should be identified and controlled by
the count supervisor
❖ 2 Select a sample of inventory and perform test counts from inventory sheets to warehouse aisle and from warehouse aisle to inventory
sheets
❖ Items which have been counted should be marked or tagged as ‘counted’ to avoid the possibility of double counting or omissions
 ❖ Inventory sheets should be completed in ink and signed by the relevant individuals involved in the counting and recording process
❖ All inventory sheets issued, whether used or unused, should be returned to the count supervisor upon completion of the count
❖ In order to minimise disruption to the production process, raw material together with parts and finished goods inventories should be
counted first with WIP inventory being counted at the end of the working day
❖ 3 Confirm the procedures for identifying and segregating damaged goods are operating correctly; Assess inventory for evidence of
damaged or slow- moving items
❖ 4 Observe the procedures for movements of inventory during the count to confirm that all movements have ceased
❖ Enquire as to the possibility of consignment or third-party inventories being held by the company and record appropriate notes for
subsequent follow up
❖ 5 Identify and make a note of the last goods received notes and goods despatched notes in order to perform cut-off procedures
❖ Obtain a photocopy of the completed sequentially numbered inventory sheets for follow up testing on the final audit
After the count

❖ Ensure all inventory count sheets have been accounted for

❖ Ensure inventory count sheets are guarded to prevent any alterations i.e inclusion of non-existent inventory, no relevant items have been
omitted, no inventory held for third party included all subsequent to the count
❖ Follow up all test counts trace test counts to final inventory sheets
❖ Ensure inclusions/exclusion of inventory is consistent with prior years
❖ Ensure exclusion of damaged or slow-moving inventories
❖ Perform cut off tests
❖ Reconciliation with inventory records, investigate and differences corrected
❖ Review replies from third parties about inventories held by them
❖ Follow up queries and notify problems to management
 INVENTORY HELD BY THIRD PARTY

3 ❖ Send a letter requesting direct confirmation of inventory balances held at year end from the third-party warehouse providers regarding
quantities and condition.
❖ Attend the third-party warehouses inventory count (if one is to be performed) to review the controls in operation to ensure the
completeness and existence of inventory.
❖ Inspect any reports produced by the third-party warehouse’s auditors in relation to the adequacy of controls over inventory.

CUT-OFF PROCEDURES

4 Purchase
❖ Identify last GRN at cut-off point and a few before it
Sales
❖ Identify last GDN at cut-off point and a few before it
❖ Match the selected GRN with purchase invoice in the current ❖ Match the selected GDNs with sales invoices in the current year
year
❖ Only goods received before the year-end should be recorded ❖ Only goods dispatched before the year-end should be recorded as
as purchases sales
❖ Unmatched GRNs will be used to accrued purchases and ❖ Unmatched GDNs will be used to update sales and trade
trade payables receivables
 INVENTORY VALUATION

5 - IAS 2 Inventories: inventory should be valued at the lower of cost and net realizable value
NRV< COST (the estimated selling price in the ordinary course of business, less the estimated costs of completion and the estimated costs
necessary to make the sale
~ NRV is likely to be less than cost when:
✔ An increase in costs or a fall in selling price / Physical deterioration / Obsolescence of products
✔ A marketing decision to manufacture and sell products at a loss / Errors in production or purchasing
INVENTORY VALUATION (IAS 2)
❖ Select a sample of goods in inventory at the year-end; Agree the cost per the records to a recent purchase invoice; Ensure that the cost is
correctly stated
❖ Select a sample of year end goods included in inventory and review post year-end sales invoices to ascertain if NRV is above cost or if an
adjustment is required
❖ For a sample of manufactured items obtain cost sheets and confirm: raw material costs to recent purchase invoices / labour costs to time
sheets or wage records / overheads allocated are of a production nature
❖ Review aged inventory reports and identify any slow-moving goods; Discuss with management why these items have not been written
down
❖ Review the inventory records to identify the level of adjustments made throughout the year for damaged/obsolete items
❖ If significant consider whether the year end records require further adjustments; Discuss with management whether any further write
downs/provision may be required
❖ Follow up any damaged/obsolete items noted by the auditor at the inventory counts attended to ensure that the inventory records have
been updated correctly

* Net Reliasable Value

❖ Develop an estimate of (or obtain actual) sales prices and proceeds in respect of inventory held at the year end
❖ Establish an estimate of costs to completion (to include in the NRV calculation)
 ❖ Determine directly attributable selling, distribution and marketing costs (to form part of the NRV calculation)
❖ Combine the three elements above (1 less 2 and 3) to arrive at NRV and compare with the cost; Discuss your findings and estimates with
management and other informed staff to gain comfort that conclusions are reasonable

USE OF STANDARD COST FOR INVENTORY VALUATION

6 ❖ Discuss with management the basis of the standard costs applied to the inventory valuation, and how often these are reviewed and
updated
❖ Review the level of variances between standard and actual costs; Discuss with management how these are treated
❖ Obtain a breakdown of the standard costs; Agree a sample of these costs to actual invoices or wage records to assess their
reasonableness

DAMAGED INVENTORIES

7 ❖ Obtain a schedule of damaged inventories and cast to ensure A

❖ During the inventory count identify the quantify of the damaged goods (auditor’s list); Agree to the schedule
❖ Discuss with management their plans for disposing of these goods, whether they believe these goods have a net realisable value at all or if
they will need to be scrapped
❖ If any of the goods have been sold post year end, agree to the sales invoice to assess NRV
❖ Agree the cost of the inventory to supporting documentation to confirm the raw material cost, labour cost and any overheads attributed to
the cost
❖ Quantify the level of adjustment required to value inventory at the lower of cost and NRV; Discuss with management

WORK IN PROGRESS (WIP)

8 ❖ Discuss with management how the percentage completions are attributed to the WIP before the attending inventory count
❖ Observe the procedures carried out by staff in assessing the level of WIP; Consider the reasonableness of the assumptions used
❖ Cast the schedule of total WIP; Agree to the trial balance and financial statement
❖ Agree for a sample that the percentage completions assessed during the count are in accordance with company policies communicated
❖ Discuss with management the basis of the standard costs applied to the percentage completion of WIP and how often these are reviewed
and updated
❖ Review the level of variances between standard and actual costs and discuss with management how these are treated
❖ Obtain a breakdown of the standard costs; Agree a sample of these costs to actual invoices or payroll records to assess their
reasonableness
❖ Agree sample of WIP assessed during the count to the WIP schedule; Agree percentage completion is correct and recalculate the
inventory valuation
3 AUDIT OF RECEIVABLES AND BANK

1
RECEIVABLES
Completeness ❖ Select a sample of GDN from before year end; Agree to sales invoices and to inclusion in the sales ledger and year-
end receivable ledger
❖ Agree the total of individual sales ledger accounts to the aged receivables listing and to the trial balance
❖ Obtain the prior year aged receivables listing and for significant balances; Compare to the current year receivables
listing for inclusion and amount due; Discuss with management any missing receivables or significantly lower
balances
❖ Review the sales ledger for any credit balances; Discuss with management whether these should be reclassified as
payables
Accuracy, (ALTERNATIVE PROCEDURES)
valuation ❖ Review the post year end cash receipts and follow through to pre-year-end receivable balances
and allocation ❖ Inspect the aged receivable report to identify any slow- moving balances, discuss these with the credit control
manager to assess whether an allowance or write down is necessary
❖ For any slow moving/aged balances review customer correspondence to assess whether there are any invoices in
dispute
❖ Review board minutes to assess whether there is any material disputed receivables
Rights and ❖ Review bank confirmations and loan agreements for any evidence that receivables have been assigned as security
obligations for amounts owed to company
❖ Review board minutes for evidence that legal title to receivables has been sold onto a third party such as a factor
❖ For a sample of receivables, agree the balance recorded on the sales ledger to the original name of the customer on
a sales order or a contract
Existence ❖ Perform a positive trade receivables circularization of a representative sample of receivable year-end balance
❖ For any non-replies, with client’s permission, send a reminder letter to follow up
2
TRADE RECEIVABLES’ CONFIRMATION LETTER (TRCL)
SD21 Procedures in obtaining receivables confirmation / circularization
⮚ Obtain consent from the FD in advance of undertaking the circularization
⮚ Obtain a list of trade receivables at the year-end; Cast this and agree it to the SLCA total
⮚ Select a sample from the receivables that ensuring that a number of nil, old, credit and large balances are selected
⮚ Circularisation letters should be prepared on client’s letterhead paper, requesting a confirmation of the year-end receivables balance, and
for replies to be sent directly to the audit team using pre-paid envelope
⮚ The FD should be requested to sign all the letters prior to them being sent out by a member of the audit team
⮚ Where a response is not received, follow this up with another letter or a phone call, where necessary alternative procedures should be
performed
⮚ When replies are received, they should be reconciled to client’s receivables records, any differences such as cash or goods in transit
should be investigated further

POSITIVE / NEGATIVE CONFIRMATION

- When confirmation is undertaken the method of requesting information from the customer may be either positive or negative

POSITIVE CONFIRMATION
● A positive circularisation letter asks customers to respond to the company auditors to either confirm the stated balance – agree or, if
disagree, to provide full details of the balance as per their own records
● Used when:
- Client’s internal control is weak
- Auditors suspects fraud and irregularities
- If there are errors in accounting records

NEGATIVE CONFIRMATION
● The customer is requested to reply only if the amount stated is disputed (Disagree)
 ● Negative confirmation is supported with other substantive procedures (Alternative procedures)
● Used when:
- Client’s internal control is strong (low CR)
- Large number of small account balances
- Errors not expected
- Customer will not ignore requests
SAMPLE – Positive Confirmation
[ AUDITOR / FIRM ]
[ Firm’s ADDRESS ]

[ DATE ]

[ BANK / CUSTOMER ]

In accordance with the request of our auditors, FIRM, we ask that you kindly confirm to them directly your indebtedness to us at (insert date)
which, according to our records, amounted to $ as shown by the enclosed statement.

If the above amount agrees with your records, please sign in the space provided below and return this letter direct to our auditors in the enclosed
stamped addressed envelope.

If the amount not agrees with your records, please notify our auditors directly of the amount shown by your records, and if possible detail on the
reverse of this letter full particulars of the difference.

We enclose a reply-paid envelope for your convenience. A prompt reply is much appreciated.

Yours faithfully,
For Manufacturing Co Limited
Reference No: ...........................
..........................................................................................................................................................
(Tear off slip)

The amount shown above is/is not * in agreement with our records as at (insert date)
Account No ..............................
Signature ................................
Date ..............................
Title or position ................................

* The position according to our records is shown overleaf

FOLLOW-UP AND ALTERNATIVE PROCEDURES

FOLLOW-UP PROCEDURES
● FOR NON-RESPONSES, WITH THE CLIENT’S PERMISSION:
❖ The team should arrange to send a FOLLOW-UP circularisation
❖ If the receivable does not respond to the follow up, then with the client’s permission, the audit senior should telephone the customer
and ask whether they are able to respond in writing to the circularisation request

● FOR RESPONSES WITH DISAGREEMENT: (EXCEPTION)

❖ The senior should identify any disputed amounts, and identify whether these relate to timing differences or whether there are
possible errors in the records
❖ Any differences due to timing, such as cash in transit, should be agreed to post ear-end cash receipts in the cash book
❖ The receivables ledger should be reviewed to identify any possible mispostings as this could be a reason for a response with a
difference
❖ If no balances have been flagged as disputed by the receivable, then these should be discussed with management to identify
whether a write down is necessary
 ❖ If there are still non-responses, then the senior should undertake alternative procedures to confirm receivables.

CLIENT CAN REFUSE CIRCULASATION OF TR. If refusal is reasonable, auditor should apply ‘alternative procedures’ if client’s request
accepted. If reason invalid, communicate with TCG and consider implications on audit report.
ALTERNATIVE PROCEDURES (AR = a, b , c, p + allowances / ave receivable days)
[same procedures for irrecoverable debts / bad debts]
❖ Review the aged receivable ledger (aging report) to identify any slow-moving or old receivable balances, discuss the status of these
balances with the credit controller to assess whether they are likely to pay
❖ Review whether there are any post year-end cash receipts for slow moving / old receivable accounts.
❖ Review customer correspondence to identify any balances, which are in dispute or unlikely to be paid
❖ Review board minutes to identify whether there are any significant concerns in relation to payments by customers
❖ Calculate average receivable days and compare this to prior year, investigate any significant differences
❖ Recalculate potential irrecoverable balances and access adequacy of allowances
❖ Select a sample of GDN before and just after the year end and follow through to the sales ledger to ensure they are recorded in the
correct accounting period (cut-off test)
❖ Select a sample of year-end receivable balances and agree back to valid supporting documentation of GDN and sales order to ensure
existence (matching)

3
BANK
Procedures in obtaining bank confirmation letter:

⮚ The auditor will produce a bank confirmation letter in accordance with local audit regulations and practices
⮚ The letter will be sent to the client to sign and authorise disclosure, then it will be forwarded to the bank by the auditor
⮚ Alternatively, the client may already have provided a standard authority for the bank to respond to a bank letter each year. In this case
separate authority would not be required
⮚ Ideally the letter should be sent one month in advance of the client’s year end to enable the bank to complete it on a timely basis
 ⮚ The bank will complete the letter and send it back directly to the auditor
Bank Confirmation Letter (BCL) reply content: [ Text page 317 ]

✔ Disclaimer by the bank (“Our response is given solely for the purposes of the audit and creates no responsibility to the auditors”)
✔ Balances on all accounts (including loans, joint accountants and trade name accounts)
✔ Details of all accounts closed in the last 12 months
✔ Facilities- loans/overdrafts/guarantees (including term, repayment, review date, limit, interest)
✔ Securities (including set-off arrangements)
✔ Additional banking relationship
✔ Custodian arrangement – the nature and quantity of any assets held but not charged (eg title deeds held for safe keeping rather than
securing a mortgage)
✔ Trade finance- letter of credit, acceptance, bills discounted, bonds, guarantees, indemnities, and other contingent liabilities
✔ Derivatives- foreign exchange contracts, forward rate agreements, financial futures, interest rate swaps, options, bullion contracts
BANK/ BANK RECONCILATION:

❖ Obtain bank reconciliation and cast the additions to ensure arithmetical accuracy
❖ Obtain a bank confirmation letter from the company’s bankers for all accounts upon
❖ Agree the balance per the bank statement to an original year-end bank statement and also to the bank confirmation letter
❖ Agree the reconciliation’s balance per the cash book to the year-end cash book
❖ Trace all of the outstanding lodgements to the pre-year-end cash book, post-year end bank statement and also to paying in book pre-year
end
❖ Trace all unpresented cheques through to a pre-year-end cash book and post year- end statement. For any unusual amounts or significant
delays obtain explanations from management
❖ Examine any old unpresented cheques to assess if they need to be written back into the purchase ledger as they are no longer valid to be
presented
❖ Agree all balances listed on the bank confirmation letter to bank reconciliation or the trial balance to ensure completeness of bank
balances
❖ Review the cash book and bank statements for any unusual items or large transfers around the year end, as this could be evidence of
window dressing
❖ Examine the bank confirmation letter for details of any security provided by client or any legal right of set-off as this may require disclosure
❖ Review the financial statements to ensure that the disclosure of cash and bank balances are complete and accurate

** Bank Recon prepared by clerk on monthly basis, reviewed by SRO, evidenced by signature, auditor reperform BR

1 Obtain BCL; 2 Cast BR; 3 Agree bank bal to BCL/BS; 4 Agree CB bal to year-end CB; 5 6 Review UPC/UCL to pre year-end CB and post year-
end BS (2ps); Old cheques written back; Review FS disclosure
4 AUDIT OF LIABILITIES AND CAPITAL

1
PAYABLES and ACCRUALS
Substantive procedures:
❖ Compare the total trade payables and list of accruals against prior year; Investigate any significant difference (TREND)
❖ Calculate the trade payables days and compare to prior years; Investigate any significant difference (RATIO)
❖ Review post year-end payments from the cash book; if they relate to the current year, follow through to the purchase ledger or accruals
listing to ensure they are recorded in the correct period
❖ Obtain supplier statement and reconcile these to the purchase ledger balances; Investigate any reconciling items (CASH-IN TRANSIT)
❖ Select a sample of payable balances and perform a trade payables’ circularization to follow up any non-replies and any reconciling items
between the balance confirmed and the trade payables’ balance
❖ Select a sample of GRNs before the year end and after the year end and follow through to inclusion in the correct period’s payables
balance to ensure correct cut-off (CUT-OFF TEST)

2
NON-CURRENT LIABILITIES (eg long-term loan)
Substantive procedures:
❖ 1 Obtain a schedule of opening and closing loans detailing any changes during the year; Cast the schedule to confirm its accuracy; Agree
the closing balances to the trial balance and draft financial statements
(schedule – name of the lender / date of loan / maturity date / interest date / interest rate / balances at end of period / security)
❖ 2 Obtain direct confirmation (BCL) at the year-end from the loan provider of the outstanding balances and any security provided; Agree
confirmed amounts to the loans schedule
❖ 3 For the new loan taken out in the year, review the loan agreement to confirm the amount borrowed, the repayment terms and the interest
rate applicable
❖ 4 For any loan proceeds / payments made during the year, agree the proceeds / payments to the cash book and bank statements
❖ 5 Agree the quarterly repayment of the new loan ($_) paid to the cash book and bank statements
❖ 6 Review the disclosure of non-current liabilities in the draft statements, including any security provided; Assess whether these are in
 accordance with accounting standards and local legislation
❖ 7 Review all loan agreements for details of covenants; Recalculate all covenants to identify any potential or actual breaches
❖ 8 Review bank correspondence to identify whether any late payment penalties have been levied; Agree these have been charged to profit
or loss account as a finance charge
3
PROVISIONS (recognized as liability) AND CONTINGENCIES (disclosure)
Substantive procedures:
❖ 1 Review authority / customer correspondence to confirm the complaint made by (_) / to establish details of claim
❖ 2 Review authority / lawyer correspondence to establish further potential non-compliance / to establish the likely outcome of the claim
❖ Obtain a breakdown of the provision; Cast it to ensure A C; Agree to trial balance and supporting documentation
❖ 4 Review the board minutes to ascertain existence, nature of claim, whether it is probable that the payments will be paid and future
potential claims
❖ 3 Send an inquiry letter to lawyer to obtain their views as to the probability of the claim being successful and potential future claims
❖ 5 Review the post year-end cash book to identify whether any payments have been made, compare actual payments to the amounts
provided to assess whether the provision is reasonable
❖ 6 Obtain a written representation from management to confirm the C of the provision (to support other evidence)
❖ 7 Review the disclosure of the provision to ensure compliance with IAS 37 Provisions, Contingent Liabilities and Contingent assets

4
ACCRUALS
Substantive procedures:
❖ Compare the accrual to the prior year and investigate any significant differences
❖ Recalculate the calculation of the accrual to confirm accuracy and discuss any unexpected variances with management
❖ Agree the year-end accrual to the general ledger and payroll records to confirm accuracy
❖ Review cash payment to post year-end cash book and bank statements to confirm completeness
❖ Review any disclosures made of the accrual and assess whether these are in compliance with accounting standards and legislation.

5
ACCOUNTING ESTIMATES (eg allowances for doubtful debts)
Substantive procedures:
❖ Enquire of management how the accounting estimate is made and the data on which is based
❖ Review the method of measurement used and assess the reasonableness of assumptions made
 ❖ Develop an expectation of the possible estimate or a range of amounts to evaluate management’s estimate
❖ Review the judgment and decisions made by management in the making of accounting estimates to identify whether there are indicators of
possible management bias
❖ Review subsequent events which confirm the estimate made
❖ Obtain written representations from management to confirm significant assumptions used in accounting estimates are reasonable

6
CAPITAL (Issuance of shares)
Substantive procedures:
❖ Review board minutes to confirm the issue of additional share capital during the year
❖ Agree the issue of shares is permitted from a review of any statutory constitution agreements (statutory documents) in place
❖ Confirm cash or other consideration has been received or receivables is included as called-up share capital not paid
❖ Inspect the cash book and bank statements for evidence of cash receipts from the share issue
❖ Recalculate the split of proceeds between the nominal value of shares and premium on issue and agree correctly recorded within share
premium account
❖ Review the disclosure of the share issue in the draft financial statements and ensure it is in line with relevant accounting standards and
local legislation

* Equity and Reserve are material in nature

7
DIRECTOR’S REMUNERATIONS / BONUS
Substantive procedures:
❖ 1 Obtain a schedule of the directors’ remuneration including bonus; Cast the schedule to ensure accuracy; Agree the amount to that
disclosed in the financial statements
❖ 2 Agree a sample of the individual monthly salary payments and the bonus payment to the payroll records
❖ 3 Agree the amount of each bonus paid post year-end to the cash book and bank statements
❖ Agree the amounts paid to each director to board minutes and contracts to ensure the amounts included in the current year financial
 statements are fully accrued and disclosed
❖ 4 Obtain a written representation from management confirming the completeness of directors’ remuneration including the bonus
❖ 5 Review the disclosures made regarding the bonus paid to directors and assess whether these are in compliance with local legislation

8
Sales / Purchase Tax Liability
Substantive procedures:
❖ 1 Obtain schedule / tax return; Cast and agree to trial balance to confirm C A
❖ 2 Recalculate sales tax to (_); Agree to tax return – can split into two points
❖ 3 Agree post (_) payment made to cash balance and bank statement
❖ 4 Review current liability disclosure with accounting standard and local legislation
STATEMENT OF PROFIT OR LOSS
[ SP = SAP (Compare) + TOD ]

1
REVENUE * (general)
Substantive procedures:
❖ 1 Compare the overall level of revenue against prior years and budgets and investigate any significant fluctuations

❖ Perform a proof in total calculation for revenue, creating an expectation of the average price for the main paint products multiplied by the
increased sales volumes for this year. This expectation should be compared to actual revenue and any significant fluctuations should be
investigated
❖ Obtain a schedule of sales for the year broken down into the main product categories and compare this to the prior year breakdown and for
any unusual movements discuss with management
❖ 2 Calculate the gross profit margin and compare this to the prior year and investigate any significant fluctuations

❖ Select a sample of sales invoices for customers and agree the sales prices back to the price list or customer master data information to
ensure the accuracy of invoices
❖ 3 Recalculate invoice totals including discounts and sales tax for a sample of invoices to confirm accuracy

❖ Select a sample of credit notes raised, trace through to the original invoices and ensure the invoice has been correctly removed from sales

❖ 5 Select a sample of customer orders and agree these to the dispatch notes and sales invoices through to inclusion in the sales ledger and
revenue general ledger accounts to ensure completeness of revenue (matching – TCSG)
❖ 4 Select a sample of GDN both pre and post year end and follow these through to sales invoices, in the correct accounting period to
ensure that cut-off has been correctly applied (sales cut-off testing)
2
Revenue for Non-Profit Oriented Organisations

Substantive procedures:
❖ 1 Obtain schedule and agree to trial balance to confirm C A

❖ 2 Compare categories of income to prior year and investigate any significant deficiencies

❖ 3 Perform proof in total (calculation) and compare to actual income recorded; Discuss any significant differences

❖ 4 Agree ticket collection to cash book and bank statement

❖ 5 Obtain breakdown and agree to supporting documentation; Recalculate fixed %

❖ 6 Compare sundry sales to prior year sales data and investigate any significant differences

❖ 7 Agree sig up document and cash receipts to cash book, bank statement and income listing to confirm C A

❖ 8 Agree donations by post to donor’s correspondence

GENERAL EXPENSES * (purchases / taxes / expenses)

3 Substantive procedures:
❖ 2 Review monthly purchases and other expenses; Compare to prior year to identify any significant fluctuations; Discuss with management

❖ 1 Compare actual expenses with the budgeted figures; Investigate any significant differences with management to assess C A

❖ 3 Recalculate the prepayments and accruals charged at the year-end / (purchase invoices total or taxes) to ensure the A of the expense
charge included in the statement of profit or loss
❖ Select a sample of post year-end expense invoices to ensure that any expenses relating to the current year have been included
 ❖ Select a sample of payments from the cash book to trace to expense account to ensure the expense has been included and classified
correctly
❖ 4 Select a sample of goods received notes (GRNs) from throughout the year, agree them to purchase invoices and the purchase day book
to ensure C
❖ 5 Select a sample of GRN both pre & post year end and follow these to purchase invoices, in the correct accounting period to ensure cut-
off has been correctly applied

PAYROLL EXPENSES
4 Substantive procedures:
❖ 2 Compare the total payroll charges this year to the prior year; Identify any significant differences; Discuss with management
❖ 3 Review monthly payroll charges; Compare this to the prior year and budgets; Discuss any significant differences with management
❖ 1 Perform a proof in total of wages and salaries, incorporating joiners and leavers and the pay increase/bonuses; Compare this to the
actual wages and salaries expense in the financial statements; Investigate any significant differences
❖ Cast a sample of payroll records to confirm completeness and accuracy; Agree the total wages and salaries expense per the payroll
system to the trial balance
❖ 4 Recalculate the gross and net pay figures for a sample of employees; Agree to the payroll records
❖ Recalculate of statutory deductions; Agree to supporting documentation to confirm whether correct deductions for this year have been
made in the payroll
❖ 5 For a sample of wage payments, agree the total net pay per the payroll records to the bank transfer listing and cash book
❖ Select a sample of joiners and leavers, agree their start/leaving date to supporting documentation; Recalculate their first/last salary to
ensure it is accurate